Mexico teaches economic reform to rest of world

As world economic leaders return home from the G20 to ponder steps their countries need to take to promote global growth, there is an unlikely reform model they would be astute to consider following.

Mexico, once synonymous with sleepy sombrero-wearing locals indulging in a lunchtime siesta, has recently set a rare example of the sorts of economic policies governments around the world should be actively pursuing in the post-financial crisis world.

Rather than pinning its hopes on the US Federal Reserve to keep the cheap liquidity flowing, or just being content to sign an international communiqué promising “growth", Mexico is getting on with the hard yards of undertaking ambitious growth-enhancing economic reforms.

Centrist Mexican President Enrique Pena Nieto has won backing from across the political spectrum for his economic reforms. Photo: Reuters

In the space of just 12 months, centrist President Enrique Peña Nieto has secured bipartisan support from the left and right parties in the Mexican Congress for a series of substantial reforms for the emerging economy.

Among the changes, competition is being injected into the previously protected energy and telecommunications sectors, education standards improved by cracking down on feather-bedding of teacher union members, unfair dismissal laws loosened to encourage workers from the cash economy to the formal sector, budget rules stiffened and the prudential supervision of banks improved while promoting competition to enhance access to credit for small business.

Advertisement

Important reforms

The International Monetary Fund’s mission chief to Mexico, Robert Rennhack, says the reforms are a “big deal" and can help lift Mexico’s growth capacity.

“It’s a lot to do in one year and the combination of the structural reforms provides important synergies," Rennhack says.

“There aren’t many countries that have done that in such a short amount of time."

President Peña Nieto, elected to a six-year term in 2012, is refusing to give in to powerful vested interests that so often skittle reform plans.

The government will open up the telecommunications industry to competition against the world’s second-richest man, Carlos Slim, who is worth nearly $US70 billion ($78 billion) and controls about 80 per cent of landlines and 70 per cent of the cellphone market.

The President has stared down months of heated street protests by a million education union members, who wanted to keep archaic rules that ensure their job is for life and allows them to pass on their position to family members.

Teachers will be evaluated and promoted on merit in a bid to lift teaching standards.

Advertisement

The constitution has been amended to allow foreign oil and gas companies into Mexican waters to challenge state-controlled Pemex. This should increase foreign investment, particularly in complex and expensive deep water drilling, increase oil production and boost jobs.

Extensive reforms

It’s an impressive reform list that evokes memories of the Hawke-Keating governments.

Meanwhile, governments around the world are struggling to induce growth, virtually running out of fiscal and central bank ammunition.

Developed and developing countries could heed the lessons from Mexico’s reform zeal.

US President Barack Obama visited the US’s southern neighbour last week for the annual “Three Amigos" trade talks, also involving Canada. For a US president who is struggling to implement a reform agenda and secure bipartisan support, Mexico’s efforts may provide some clues. Indeed, if Obama personally confronted the protectionists in his own Democratic Party, regional free trade deals with the Asia-Pacific region and Europe would be a big boost for global growth.

Australian Treasurer Joe Hockey has taken note of Mexico, saying before weekend’s G20 meeting that Mexico had undertaken significant reforms.

Unlike India and Turkey, Mexico has largely been sheltered from the recent flight of foreign capital that has caused turmoil in other emerging economies. It learned the painful lessons of the “Tequila crisis" in 1994. In that episode, Mexico ran out of foreign currency reserves and devalued the peso, causing the country’s foreign debts to surge and a panic in the country’s banking system.

Since those heady days, a 3 per cent inflation target, independent central bank, prudent budget deficit limits and a modest current account deficit have allowed Mexico to build credibility in international financial markets.

‘A’ rating from Moody’s

Credit rating agency Moody’s last month made Mexico only the second country in Latin America to earn an “A" grade sovereign rating, due to the structural reforms being pushed through.

As the Fed continues winding down its bond-buying campaign, Mexico is better placed than the likes of Brazil, India, Indonesia, Turkey and South Africa.

“As US interest rates rise, there will be less liquidity floating around the world. So the tide of capital is now flowing out but Mexico is well prepared for it, given its strong fundamentals," Rennhack says.

With annual GDP per capita of just below $US10,000, Mexico still has a long way to catch up to the developed world.

But it is clear that Mexico is far better placed to fulfil its G20 commitment to promote growth than other emerging economies that have refused to take remedial action on their budgets, inflation, political instability and outdated economic frameworks.

John writes on economic policy and the intersection of politics and business. From August 2013 to June 2018, John was US Correspondent for The Australian Financial Review in Washington. He joined the masthead in 2008 and has covered banking, tax, politics and the economy. John began his career at Treasury as an economic policy analyst. He has worked part-time as a sports broadcaster. Connect with John on Twitter. Email John at jkehoe@afr.com.au